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Tax Reform

Superannuation and Tax Reform

Chris Morcom
Partner/Private Client Adviser
28 Sep 2015

Recent changes in government leadership have seen all aspects of tax reform and superannuation policy, back on the agenda. Understandably though, investors and those planning their financial future could be excused for feeling a bit exasperated. 

Uncertainty created by a constantly moving taxation regime in regards to superannuation is unhelpful to high net worth (HNW) Australians and may very likely result in a loss of confidence in the system.

It is critical that the government recognises the need for a stable legislative environment, particularly in relation to longer term strategies such as superannuation. Effectively planning your financial future requires commitment and flexibility to cope with life’s challenges and requires consistency.

I urge the government and legislators to cautiously review the taxation of superannuation when considering overall reform. 

Superannuation taxation concessions

In the firing line are super concessions for the “wealthy”.

The current superannuation system offers taxation incentives for people to forego some of their income during their working life in order to guarantee an income in retirement.

Late last week federal opposition leader Bill Shorten said he intends to wind back “excessive loopholes” which favour high net worth individuals. This follows an announcement earlier this year where Labor indicated it would tax earnings in retirement at 15 per cent for those earning over $75,000 and reduce the threshold of the high-income super charge to $250,000 from $300,000, if elected to government.

In addition to being economically inefficient, this effectively reduces the incentive for HNWs to save for retirement. With Australia’s ageing population, it is in the country’s best interest that the government enable Australians to save for retirement, to reduce reliance on the Age Pension. 

Individuals can increase their contributions to superannuation by sacrificing part of their salary before tax, both increasing their super balance and reducing their taxable income. For those who are on the top marginal tax rate, this strategy reduces the tax on this part of their earnings from 45 per cent plus Medicare to 15 per cent (or 30 per cent if they earn over $300,000 per annum).

The money contributed to superannuation is then locked away and cannot be accessed until preservation age (age ranges from 55 to 60, depending on their date of birth), and only then to provide an income stream unless the individual has retired from employment. 

Contribution limits are limiting accumulation

There are currently contribution limits that effectively prevent concessionally taxed contributions in excess of $30,000 (for those under 50 years of age) or $35,000 (for those over 50 years of age).  This limits the ability of older, high income earners to shield taxable income via their super fund. 

Further, these limits have a hidden cost for people who take time out of the workforce, particularly women.  For those not working, contributions to super are not being made, reducing the compounding of benefits and the provision made for retirement. A way to catch this up is to make concessional contributions however they are restricted by the limits.

What happens if incentives are removed?

While the tax concessions for superannuation may appear generous, and the contributions caps reasonable, there needs to be an incentive for people to accumulate wealth via their superannuation, alleviating the pressure on the Age Pension. Without incentives, the superannuation system becomes unattractive – particularly for those early in their careers who may not able to access their benefits for 35-40 years.

According to AustralianSuper, the average retirement balance in superannuation for men is $198,000 and women is $112,600.  This is indicative of a retirement income system that is yet to mature, not one full of taxation rorts – something we need to remember.

It will take approximately 40 years after the minimum superannuation guarantee reaches 12 percent (in 2025) that people starting work in 2025 can look to access their super.  Only then will we be able to judge the effectiveness of a mature retirement income policy for Australia.

With all that being said, the government needs to be mindful of the long term nature of superannuation, the planning many have already undertaken based on current rules, and the affect that any changes will have on younger generations and those who spend time out of the workforce during their working life.

Removing superannuation incentives will hurt many.  

The information provided above is general information only and individuals should seek specialised advice from a qualified financial adviser. Please contact Hewison Private Wealth for more information. 

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.